Bitcoin is Not a Tech Stock
Why is it so closely correlated to the NASDAQ?
“Bitcoin Is Increasingly Acting Like Just Another Tech Stock” - New York Times, May 11, 2022
Yes it is. But why? I tried to get answers, but no one from Bitcoin’s offices returned my calls. Kidding, of course. Bitcoin is not a stock, it’s not a corporation, it has no earnings and no personnel. So why is it behaving more and more like a stock? A technology stock, in particular?
The past few weeks, Bitcoin and all of the stock market indices having been plunging together. It hasn’t been pretty. And the pain has been shared all around. It’s not a new phenomenon, however. Bitcoin has been growing more and more correlated to stocks, especially tech stocks, since last year. Let’s look at the numbers.
Over the last five years, Bitcoin is up over 1,000 percent (as of Wednesday). The S&P 500, only 63%, and the NASDAQ up 86%. So, longer-term, no correlation.
But in 2022 so far, Bitcoin is down 37%, the NASDAQ down 29%, and S&P down 18%. A much stronger correlation. They are getting much closer. In fact, Bitcoin’s correlation to the S&P 500 has only been higher for five days in Bitcoin’s history. The correlation factor is at its highest level since October 2020, at an index of .49. A figure of 1.00 would be perfectly correlated, moving totally in lockstep.
(For comparison, Bitcoin’s correlation to the S&P from 2017 to 2019 was just .01!)
The chart below comparing Bitcoin to the NASDAQ index shows remarkably similar patterns so far in 2022:
Bitcoin’s correlation to the NDX is at an all-time high of .6945.
What’s All This About Risk-on and Risk-off?
I see these buzzwords every day. It’s actually two different concepts, risk assets and risk environments.
Risk-on and risk-off environments are responses to global economic conditions and other factors, such as corporate earnings, interest rates, and economic data. When risk is perceived to be low, investors tend to engage in higher risk investments. Conversely, when risk is seen as high, investors may flock to safer assets.
Stocks, high-yielding bonds and even real estate are considered to be “risk-on assets.” Gold, treasury bonds and higher grade corporate debt are considered “risk-off assets,” or defensive plays.
Bitcoin and all cryptocurrencies have generally been seen as risk-on assets by investors. But should they be? Let’s examine that.
What is Stoking the Fear in the Markets Right Now?
Stocks are getting spooked by all kinds of global economic conditions right now. And they’re valid concerns.
Inflation, at forty-year highs.
Corporate earnings, many disappointing, even big companies.
Global supply chains, sure to hurt earnings even more.
Fuel and grain shortages.
War in Ukraine.
Why do I point these out? To emphasize that none of these major economic troubles in the world have any effect on Bitcoin. Bitcoin has no earnings multiple, and Bitcoin is not hurt by inflation. Fiat currencies are ravaged by inflation, and the printing of fiat is the major driver of inflation. Bitcoin, with its fixed cap, should be anti-inflation.
Also noteworthy is that all cryptocurrencies seem to move in lockstep, even though they are all very different assets.
Will Bitcoin De-peg From Tech Stocks?
In March of 2020, Bitcoin crashed along with all equities due to the onset of the global pandemic. After that, a de-pegging of the correlation between crypto and stocks occurred. Will it happen again? David Nage, of the crypto investment firm Arca, said “I definitely believe that the way digital assets will potentially de-peg from the correlation with equities will be to attract interest, and it’s new platforms and innovation that create that.”
Will Clemente III, the 20-year old Bitcoin charts wizard at Blockware, also believes that the de-peg will occur, and for different reasons. Will has been reporting for a while now that Bitcoin has been transferring from short-term traders to longer term holders and larger institutions. Here’s Will’s take:
“Going on the record and say that I think we see a decorrelation between Bitcoin and stocks in the next twelve months once this transfer of supply is complete. If/when this occurs, it would be quite reflexive and powerful.” - Will Clemente III.
I believe there are two main reasons why Bitcoin is behaving in strong correlation to stocks. And I’ve been saying this for a while.
We are so early in Bitcoin’s existence.
Bitcoin is so misunderstood.
Stay tuned. And thanks for reading.
Recommended Bitcoin Tools, Platforms, Podcasts:
Gemini - My choice for buying and HODLing Bitcoin, rated tops for safety and security. User-friendly platform and phone app. Earn Bitcoin rewards as well with the Gemini Credit Card.
Arculus - The crypto hardware wallet from Arculus is one of the best products on the market for storing your coins. Very easy to set up and to use, and very affordable.
Lolli - The Lolli shopping app lets you earn great Bitcoin rewards on practically everything you buy, whether you’re shopping on your phone, computer, or in-person.
Twitter - Follow The Bitcoin Files on Twitter at @BitcoinNewslet1 for all of my articles, commentary and links to my contributions to Bitcoin Magazine.
Medium - Check out my writings on Medium, including articles not featured in the newsletter. Join my 500 other followers who read and write about crypto. medium.com/@rickmulvey
Podcasts - To hear the top names in Bitcoin, and learn more than you could imagine, check out The Pomp Podcast with Anthony Pompliano, What Bitcoin Did with Peter McCormack, and The Wolf of All Streets Podcast with Scott Melker.
Issue No. 56, May 13, 2022
Rick Mulvey is a CPA, forensic accountant and crypto consultant. He writes about all things Bitcoin, and yells at the Yankees and Giants. He also runs marathons and makes wine, neither professionally.
Follow on Twitter! The Bitcoin Files Newsletter